New England Isn't Texas; Workout Specialist Who's Worked in Both Places Gauges Real Estate Values by Three Measures

New England Isn't Texas; Workout Specialist Who's Worked in Both Places Gauges Real Estate Values by Three Measures

Despite the doomsday headlines and the inevitable comparisons with the Southwest, Bank of Boston's Guilliaem Aertsen sees some cause for hope amid New England's commercial real estate troubles.

Aertsen (pronounced Ertsen), who goes by the nickname "Rusty," says there are differences between the New England and Southwest markets that make it more practicable to restructure troubled commercial real estate loans in New England.

He ought to know. Before becoming head of Bank of Boston's real estate department last year, Aertsen spent a lot of time working out real estate problem loans in Texas and elsewhere for the bank. One of his institution's workouts was profiled recently in The New York Times.

Similarities and differences. Aertsen acknowledges that the two regions have some parallel problems.

Both suffer because economic booms--New England's driven by high technology and the Southwest's by energy resources--encouraged speculative development. As the economies slowed, developers in both regions kept building, reaching to grasp all they could of the waning growth. More unique to New England, particularly Massachusetts, good times spurred excessive state government spending. Aertsen believes this exacerbated the region's problems.

One critical difference, in Aertsen's view, lies in the effort required to launch a commercial real estate project.

"We have very significant land use policies in New England," Aertsen explains. "It can take quite a long time for someone to assemble a site here--sometimes years."

By contrast, the quantity of land and comparatively easier policies in place in the Southwest made it much easier to assemble tracts necessary for commercial development. And where developers encountered stumbling blocks, there were often alternative sites they could switch to.

Different stripes. Aertsen says the characteristics of the developer communities in the two regions differ.

In New England, much of the land acquired for development is in the hands of what Aertsen calls "investment builders." Often these firms are family-run organizations that have owned the property for years. The firms have earnings streams from properties already built, plus the advantage of capital built up in better times. And, critically, when things began to sour, many of their properties were already at least partially leased.

And then, according to Aertsen, the region's economy benefited from diversity built up over decades. While high tech faltered, some companies and industries that had been in the region all along were still there, grinding away at what they had done for generations. Aertsen gives examples: a Massachusetts company that has produced paper for currency since before the American Revolution; a regional specialty in clocks for ships; and a steady tourism business.

"Notwithstanding that the bloom is off the economic rose," says Aertsen, "we still have a strong economic base."

In the Southwest, developers more typically are what Aertsen calls "merchant builders." These firms started with one project, got it going, made some profit, and used the gain to move on to the next project. They leveraged successes into more successes. As long as the stream of building continued, they kept the string moving.

Many of their properties were built entirely on speculation and when the buildings were completed, the developers had to go find tenants.

Three-tier appproach. Aertsen looks at commercial real estate values and the loans the properties secure in three pieces.

The first is that portion of the value that is permanently impaired. This is the chunk created in the boom times. It has simply evaporated.

The second piece is value that is temporarily impaired. The leases on the property (assuming it is a completed building that is at least partially occupied) are worth less than they were. …

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